Cyclin-dependent kinases have been implicated in the inactivation of retinoblastoma (Rb) protein and cell cycle progression. Recent studies have demonstrated that the lipid molecule ceramide is able to induce Rb hypophosphorylation leading to growth arrest and cellular senescence. In this study, we examined the underlying mechanisms of Rb hypophosphorylation and cell cycle progression utilizing the antiproliferative molecule ceramide. C₆-Ceramide induced a G0/G1 arrest of the cell cycle in WI38 human diploid fibroblasts. Employing immunoprecipitation kinase assays, we found that ceramide specifically inhibited cyclin-dependent kinase CDK2, with a mild effect on CDC2 and significantly less effect on CDK4. The effect of ceramide was specific such that C₆-dihydroceramide was not effective. Ceramide did not directly inhibit CDK2 in vitro but caused activation of p21, a major class of CDK-inhibitory proteins, and led to a greater association of p21 to CDK2. Using purified protein phosphatases, we showed that ceramide activated both protein phosphatase 1 and protein phosphatase 2A activities specific for CDK2 in vitro. Further, calyculin A and okadaic acid, both potent protein phosphatase inhibitors, together almost completely reversed the effects of ceramide on CDK2 inhibition. Taken together, these results demonstrate a dual mechanism by which ceramide inhibits the cell cycle. Ceramide causes an increase in p21 association with CDK2 and through activation of protein phosphatases selectively regulates CDK2. These events may lead to activation of Rb protein and subsequent cell cycle arrest.